News

• As expected, BNM kept its OPR unchanged at 3.00%.

• On global developments, the MPC cited economic activity in major advanced economies has improved but remained moderate while growth in Asia was driven by domestic demand. The MPC forecasted global growth to improve slightly in 2017, partly due to fiscal policy in advanced economies. Nevertheless, there is uncertainty arising from protectionism risks and financial market volatility.

• On the financial market, the MPC acknowledged that in recent weeks, uncertainties in global economic, policy environment and geopolitical developments led to heightened financial market volatility with adverse effect on various asset classes, including the ringgit. In this regard, BNM is committed to continue providing liquidity to ensure orderly functioning of the domestic FX market.

• It also emphasised ample liquidity in the banking system, strong capital and liquidity buffers in the financial institutions and an accessible capital market.

• The MPC reiterated its economic projection for 2016 and 2017 to remain on track, supported by domestic demand. Private consumption will be sustained, while investment activity will be supported by on-going infra projects and capex in the manufacturing and services sector. Meanwhile, export is expected to expand modestly.

Comments

• The tone of the latest MPS was broadly neutral with more caution towards global downside risks despite an expected improvement in global growth in 2017.

• On growth prospects, BNM’s reiteration of official forecast (4-5% in 2017) is in line with our projection as we expect GDP growth to be higher at 4.5% in 2017 (2016e: 4.2%), premised on a recovery in the primary sector, strong construction and stable services offsetting slower manufacturing growth.

• On inflation, we maintain our 2016 CPI growth forecast at 2.1%. We expect inflation to average 2.7% in 2017, tilted towards the higher-end of official projection of 2.0-3.0%. Our forecast has factored in higher fuel prices (Brent oil assumption: US$50/bbl in 2017; average 2016: US$44/bbl) and sustained food inflation arising from removal of cooking oil subsidy and weaker ringgit.

• At the current level of OPR, the MPC said the degree of accommodation is consistent with the steady pace of economic activity and stable inflation, indicating neutral bias in monetary policy. However, BNM also noted that the risk of destabilising financial imbalances has been contained. We view this as a signal from the MPC on its willingness to ease policy (i.e. cutting OPR or SRR) should growth prospects weaken considerably.

• We retain our forecast for BNM to maintain the OPR at 3.00% on expectations of stronger growth next year. That said, any adverse external development (i.e. trade protectionism) represents downside risk to growth which may prompt BNM to accord more policy accommodation.

Source: Hong Leong Investment Bank Research - 24 Nov 2016